EurAsEC Trans Cor

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The EurAsEC

Transport Corridors

Sector Report

March 2009


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The Eurasian Development Bank is an international financial institution established topromote economic growth and integration processes in Eurasia. The Bank was founded by theintergovernmental agreement signed in January 2006 by the Russian Federation and the Republicof Kazakhstan. Negotiations are currently under way with a number of neighbouring countries.Electric power, water and energy, transportation infrastructure and high-tech and innovativeindustries are the key areas for Banks financing activity.

The Bank, as part of its mission, provides quality research and analysis of contemporary developmentissues and trends in the region with particular focus on Eurasian integration. The Bank conductsregular conferences and round tables addressing various aspects of integration. In 2008, theBank launched quarterly academic and analytical Journal of Eurasian Economic Integration andan annual EDB Eurasian Integration Yearbook. In addition, the Bank publishes regular analyticaldigests covering regional integration, development banks activities and investment projects inthe post-Soviet space.

The Banks Strategy and Research Department publishes detailed Sector and Country AnalyticalReports. It also plans to realise a number of research and technical assistance projects. TheSystem of Indicators of Eurasian Integration project is the first in the project pipeline.

Address:

Republic of Kazakhstan050000, Almaty, Panfilov St. 98

Eurasian Development Bank

Tel.: +7 (727) 244 40 44 ext. 6146Fax: +7 (727) 244 65 70, 291 42 63

E-mail: [email protected]://www.eabr.org

No part of this publication may be reprinted or reproduced or utilized in any form, including reprinting and recording of

any kind without due reference to this publication. The views expressed in this publication are those of author and do not

necessarily reflect the views of the Eurasian Development Bank.

The authors:

Evgeny VINOKUROVPh.D., Head of Economic Analysis Unit, Strategy and Research Department, EDBEmail: [email protected]

Murat JADRALIYEVM.P.I.A., Senior Analyst, Economic Analysis Unit, Strategy and Research Department, EDBEmail: [email protected]

Yury SHCHERBANINPh.D., Professor, Head of Laboratory, Institute of Economic Forecasting,Russian Academy of SciencesEmail: [email protected]


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Evgeny Vinokurov, Murat Jadraliyev and Yury Shcherbanin (2009) The EurAsEC Transport Corridors.Sector Report no. 5. Eurasian Development Bank

Executive Summary 5

Abbreviations 7

1. Scope of this report 8

2. The transit and transport potential of EurAsEC 9

2.1. Review of cargo flows between EurAsEC member countries 9

2.2. Cargo transportation potential in the context of the global crisis 10

2.3. Review of Eurasian cargo flows from Asia to Europe 11

2.4. Review of potential cargo flows along China-Western Europeoverland routes via CIS countries 14

. The existing and emerging international transport corridorsin the region 18

3.1. The role of international transport corridors in EurAsEC 18

3.2. Pan-European corridors 19

3.3. Railway corridors 21

3.4. Motorway corridors 28

4. Key issues affecting cargo transit on EurAsEC ITCs 1

4.1. Sea vs land: 2:1 31

4.2. Barriers to fulfilling the regions transit potential 33

5. Transport strategies and targets for investment 8

5.1. National transport strategies and ITCs 38

5.2. Targets for investment 41

6. The integration of the Eurasian transport system 4

6.1. EurAsEC initiatives 43

6.2. CIS integration initiatives 44

6.3. Initiative 1520 45

6.4. Outlook for integration of transport systems 46

7. Faster, cheaper, smoother: the priorities in the developmentof ITCs in EurAsEC 48

Sources 49

Tables

Table 1. Trade turnover between EurAsEC member countries 9

Table 2. Chinas trade with Europe and the CIS in 2007 11

Table 3. South Koreas commodity trade with Europe and the CISin 2007 12

Table 4. Aggregate transit potential of EurAsEC member countries

31Table 5. Physical and non-physical barriers to trade 34


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Table 6. Forecast of cargo transit via Russia 38Table 7. Participation of EurAsEC countries in transport infrastructure

projects until 2020 47

Figures

Figure 1. Potential cargo flows between EurAsEC countries 10

Figure 2. Exports to the EU from China, South Korea and India 11

Figure 3. Structure of Chinese exports to Europe, 2007 12

Figure 4. Transshipment of containers at Dostyk 14

Figure 5. Existing and potential cargo flows via EurAsEC 17

Figure 6. Pan-European corridors 20Figure 7. Journey times of Trans-Siberian Railway services 22

Figure 8. TRACECA 24

Figure 9. Main railways 26

Figure 10. Motorway corridors 29

Figure 11. Railway freight transportation and the freight rail car fleetin EurAsEC 42

Figures 12. Main 1,520-mm gauge railways 45

Boxes

Box 1. Main commodity groups that can be transportedby Eurasian routes (ChinaWestern Europe) 15

Box 2. The XUAR and transit to Western Europe 16

Box 3. The TRACECA Programme 25

Box 4. Outlook for the development of container traffic 25

Box 5. Sea and rail container freight tariffs in Eurasia 32


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5Evgeny Vinokurov, Murat Jadraliyev and Yury Shcherbanin (2009) The EurAsEC Transport Corridors.Sector Report no. 5. Eurasian Development Bank

1. The geographic and geo-economic location of EurAsEC countries gives them significantstrategic potential for freight transit. Analysts estimate that the regions total potentialtransit capacity is about 220 million tonnes at present. This figure is expected to increase to400 million tonnes by 2020, 290 million tonnes of which will originate in EurAsEC countries fortransport on to third countries. EurAsEC has motorway and railway corridors running east-west andnorth-south, and a number of new corridors are being constructed. However, to handle such hugevolumes of cargo, the regions existing transport infrastructure must be modernised.

2. EurAsEC states are not making the most of their transport potential. At the moment,these countries are handling only half their potential cargo flow. The main limiting factor isEurAsECs current inability to become the key cargo transit route between the mainlands twomacroregions the European Union (EU) and the Asian-Pacific Region (APR), principally China.Trade between these two regions will reach $1 trillion within the next few years. Only 1% of the cargotransported between the EU and the APR utilises the EurAsEC international transport corridors (ITC).

Meanwhile, sea freight companies are earning billions of dollars. According to available data, ofthe 17.7 million TEU transported from Europe to Asia in 2008, only 74,551 TEU were transshippedvia Dostyk (0.42%), including 0.35% from Europe to Asia.

3. Sea vs land: 2:1. Transportation of transit cargo by sea (transoceanic service) has somestrong advantages, such as low delivery cost, established relationships with customers and highstandards of service. This leads us to conclude that sea transit will prevail in the near future. Landtransit routes offer only one competitive advantage speed of delivery, which is two tothree times faster compared with the sea routes linking East Asia with Europe. This advantagemust be exploited. A considerable proportion of time-sensitive transit (some 16 million tonnesannually, according to the most conservative estimate) can be redirected to ITCs operated byEurAsEC.

4. There are a number of physical and non-physical barriers to the realisation of the EurAsECstransit potential. Physical barriers include the poor state of motorways and railways and their

related infrastructure, i.e. obsolete rolling-stock, which prevents any increase in transportationspeeds and volumes; existing roads do not meet international standards; border crossing pointsand logistics centres have a low throughput capacity. Non-physical barriers include cumbersomepermit systems, unreasonable delays in crossing borders, various charges and additional taxesimposed by regulatory and local authorities, scheduled and spot-check inspections of cargo weight,etc. The non-physical barriers are the most significant obstacles to the developmentof cargo transit in the region and cause serious delays in cargo delivery. Time lost does notonly result in loss of money and customer trust, but also the loss of the main (in fact the only)competitive advantage land transit has over sea transit.

5. There are two complementary ways to reduce physical and non-physical barriers:

a) integrating national transport systems, which we consider to be key to overcoming barriersby introducing well-coordinated transport policies and by harmonising and fine-tuning nationallegislation, etc.; and

b) well-coordinated investment policy for priority national projects is required in order torealise transit potential and foster mutual trade between EurAsEC member countries, includingprojects to construct priority railway and motorway routes, develop logistical and borderinfrastructure, and renew existing rolling-stock.

Together, the above factors should enable the physical and non-physical barriers to be minimisedand encourage joint investment in the renewal of transport infrastructure and construction of serviceand logistics centres. Ultimately, these will have a positive impact upon economic integration.

6. Projects to construct or modernise transport infrastructure are exceptionally capital-intensive.Therefore, the regions countries must identify the priorities for their concerted action inorder to develop transit flows and support integration. In order to maximise transit potential, themost important ITCs are the northern corridor of the Trans-Asian railway (which connectsto the Trans-Siberian railway) and the 10,000-km Western Europe West China motorway

corridor. The transport capacity of the Trans-Asian railway is not fully utilised, whilst the TRACECA(Europe-Caucasus-Asia) international transport corridor, with its numerous transshipments, ferryports (Turkmenbashi and Baku on the Caspian and Poti, Batumi, Varna and Odessa on the Black


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Sea) and high capital intensity is unlikely to be competitive in the Europe-Asia direction. Accordingto preliminary estimates, all other conditions being equal, the freight tariffs charged by Russianrailways (RZD) for grain, cotton and containers are 1.7 times lower than those of TRACECA, andfor oil and non-ferrous metals this ratio is 1.2. In addition, transportation via Russia is 1.8 timesfaster.

7. Given their geographic position and national economic interests, Russia, Kazakhstan and theirneighbours have a direct interest in the Eurasian integration process that extends beyond theboundaries of the post-Soviet space and involves the regions most important countries. Projectsimplemented in certain economic sectors provide a reliable basis for regional economic integration.Transportation is undoubtedly among these priority sectors.


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ADB the Asian Development BankAPR the Asian-Pacific Region

CA Central Asia

CAREC the Central Asia Regional Economic Co-operation

CIS the Commonwealth of Independent States

CP checkpoint

CTP Council on Transport Policy

CU Customs Union

EBRD the European Bank of Reconstruction and Development

EDB the Eurasian Development BankEU the European Union

EurAsEC the Eurasian Economic Community

GLONASS the Global Navigation Satellite System

IDB the Islamic Development Bank

IT information technology

ITC international transport corridor

KTZ Kazakhstan Temir Zholy (Kazakhstan railways)

RZD Russian Railways (Rossiyskie Zheleznie Dorogi)

SEA Southeast Asia

SEZ special economic zone

TEU twenty-foot equivalent unit

TRACECA Transport Corridor EuropeCaucasusAsia

TSR the Trans-Siberian Railway

UN the United Nations

UNDP the United Nations Development Programme

UNECE the Economic Commission for Europe

UNESCAP the Economic and Social Commission for Asia and the Pacific

UTS Unified Transport System

WB the World Bank

XUAR the Xinjiang Uigur Autonomous Region


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Transport is at the heart of an efficiently functioning economy, since it provides an infrastructuralbasis for sustainable development. In modern times, when individual economies are joiningtogether to form a global production network, access to efficient transportation and communicationssystems is an essential precondition for integrating into this network (Lakshmanan, 2001).

For EurAsEC members Belarus, Kazakhstan, Kyrgyzstan, Russia and Tajikistan whose mutualtrade turnover and, accordingly, cargo transportation have been rapidly increasing recently (by2020, their cargo transportation may total 490 million tonnes, a four-fold increase compared with2000), the development of transport infrastructure is vital in sustaining the rapid expansion ofmutual trade and economic integration.

Today, analysts estimate the transit potential of EurAsEC at around 220 million tonnes. By 2020,this may increase to 400 million tonnes, with about 290 million tonnes of cargo potentially beingtransported from EurAsEC to third countries. In order to be able to handle these enormous volumesof cargo, the regions existing transport infrastructure needs to be modernised.

However, EurAsEC does not fully utilise its transit capacity, handling only half of its potential cargoflow. The main reason for this is its failure to become a key transit route between the two globalcommodity-producing centres, the EU and the APR. Trade turnover between these regions willreach $1 trillion in the next few years. Only 1% of the cargo generated is being transported via theITCs of EurAsEC. In this paper, we will attempt to identify measures that need to be taken to makethe regions ITCs a realistic source of transit revenue for EurAsEC countries.

The purpose of this review is to provide an insight into the diverse problems associated with transitvia EurAsEC. Firstly we examine competition in the transit transportation industry and the structureof competitive advantage in sea and land freight transit. Secondly, we identify specific cargoeswhich can be transported via the ITCs of EurAsEC. Thirdly, we analyse physical and non-physicalbarriers to the realisation of the regions transit potential, and propose measures to eliminate thesebarriers. We also discuss various potential targets for investment and the progress of transportintegration in EurAsEC. Finally, we provide detailed information on existing and emerging ITCs inEurAsEC countries, and highlight the most promising and efficient ITCs which are already helpingthe region to achieve its transit potential and further the integration of EurAsEC countries.


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Table 1.Trade turnover betweenEurAsEC member countries($ million)

Source: state statisticsagencies of EurAsEC membercountries

2.1. Review of cargo flows between EurAsEC member countries

The foreign trade turnover of EurAsEC has been increasing steadily in recent years. Between 2005and 2008, total turnover from trade between EurAsEC countries almost doubled in monetary terms(see Table 1). This is largely attributable to the trends and structure of economic co-operationinherited from the Soviet era, the regions relatively rapid economic growth, the development ofindustries producing raw materials and semi-finished goods (so-called commodity cargoes), andexpansion of internal and foreign trade.

Tradeturnover by

country pair

2005 2006 2007 2008

RussiaBelarus

15834.0 19944.0 26074.0 34188.9

RussiaKazakhstan

9 749.0 12807.0 16576.0 19731.7

RussiaKyrgyzstan

544.0 755.0 1 169.0 1802.9

RussiaTajikistan

335.0 504.0 772.0 1002.8

KazakhstanBelarus

234.5 355.3 525.3 567.0

KazakhstanKyrgyzstan

344.1 406.7 517.0 608.4

KazakhstanTajikistan

167.6 185.1 198.9 295.4

BelarusKyrgyzstan

10.8 21.5 25.8 47.8

Belarus

Tajikistan 12.0 18.0 34.0 75.1

KyrgyzstanTajikistan

24.9 26.7 30.4 43.2

Totalcommodityturnover

27 255.8 35 023.3 45 922 58362.5

Source: The CIS statistical committee

In tandem with the increase in revenues generated by trade between EurAsEC countries, volumesof cargo transported within EurAsEC have also grown at a rapid pace. According to the EurAsEC

Integration Committee, total cargoes will reach 490 million tonnes by 2020, i.e., four times thevolume transported in 2000. Even allowing for the expected slowdown, cargo flows betweenEurAsEC countries will continue to grow by more than 15% annually (see Figure 1).


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Clearly, this rapid growth of cargo flows between EurAsEC member countries will soon necessitatean overhaul of the existing transport infrastructure, and capacity expansion, above all in railways,motorways and logistics centres.

2.2. Cargo transportation potential in the context

of the global crisis

The UNECEs Inland Transport Committee defines an international transport corridor as part ofa national or international transport system which maintains considerable international cargoand passenger transportation between certain geographic regions and includes the rolling-stockand immovable structures of all modes of transport working on the respective route, and alltechnological, organisational and legal conditions for such transportation. Using this definition,

and in order to understand the urgency with which the EurAsEC must develop its ITCs, it is essentialfirst to evaluate existing levels of cargo1 transportation in the region and the potential for transitvia these countries.

ITCs in this region are uniquely important because of the regions geographic and geo-economiclocation between two macroregions, the European Union (EU) and the Asian-Pacific Region (APR).Trade between the EU and the APR totalled $700 billion in 2007 and is set to reach $1 trillion by2010.

Evidently, given the global financial and economic crisis, certain adjustments will have to be madeto any estimates of future trade between Europe and Asia. The recession-stricken countries ofWestern Europe are experiencing a considerable contraction in domestic demand and, as a result,have reduced the volumes they import from Asia, especially of cheap commodities from China.The latter, being an export-orientated economy, responded with a package of anti-crisis measuresaimed at stimulating domestic demand and reducing its reliance on exports. However, we believethat exports to richer, developed countries (primarily the US and Europe) will remain a priorityfor the developing Chinese and APR economies (the traditionally high level of savings in thesecountries will preclude any significant increase in domestic demand, and during the crisis theirgovernments will focus on subsidising exports as a more immediate and proven policy).

In addition, drawing our conclusions from the fundamental scenario of cyclical crises, by the endof 2009/early 2010, the world will move into a period of economic growth once again, leading to anincrease in commodity turnover between the worlds main production and consumption centres.Therefore, despite a relatively small contraction in EU-APR trade in 2008-2009, the forecast levelof $1 trillion can be achieved, albeit somewhat later by 2013-2015, we estimate. Thus, in spite ofthe global crisis, the enormous transit potential of EurAsEC countries is undiminished, especiallyin the East-West direction.

Figure 1.Potential cargo flows betweenEurAsEC countries

Source: EurAsEC IntegrationCommittee

1Thisreportdiscussesonlycargotransportation(leavingasidepassengertransportation)basedonitsimportanceinrealisingtheregionstransitandtransportpotential.


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2.. Review of Eurasian cargo flows from Asia to EuropeWhen analysing the cost indicators of Eurasian cargo flows and the load on inland freight transitsystems, the three major cargo centres that should be examined are China, South Korea and India.China and South Korea are Europes main partners in the Far East. India is a source of cargo thatcould potentially be transported to Europe along North-South routes.

In 2007, China was the worlds second largest exporter ($1,217.8 billion) and third largest importer($956 billion) in monetary terms (WTO 2008:39).

The table below shows Chinas trade with Europe and the CIS by main commodity group.

Figure 2.Exports to the EUfrom China, South Koreaand India ($ billion)

Source: WTO (2008)

India

South Korea

China

Table 2.Chinas trade with Europe

and the CIS in 2007($ billion)

Source: WTO (2008)

CommodityTotal trade Europe CIS

Export Import Export Import Export Import

Agriculturalproduce

38.9 65.4 6.6 5.4 1.6 5.9

Fossil fueland minerals

41.9 210.6 5.5 9.0 0.7 17.3

Finished goods 1134.8 677.5 251.8 104.9 45.7 4.7

Including:

Metals 51.5 24.1 10.4 3.8 1.6 1.2

Chemicals 60.3 107.4 11.2 14.7 2.2 3.0

Office equipment 347.8 226.5 84.1 9.7 4.3 0.04

Transportequipment

59.1 41.7 13.6 18.1 3.5 0.1

Textiles 56.0 16.6 8.5 1.2 2.8 0.01

Clothing 115.2 2.0 25.8 0.4 6.9 0

TOTAL: 1217.8 956.0 263.9 120.0 48.0 28.0


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Chinas main exports to Europe are finished goods accounting for about 95% in monetary terms(see Figure 3). These include office equipment (31%), transport equipment (about 19%), textiles(nearly 10%), chemicals (over 4%) and other items (see Table 2). These commodities are suitablefor containerised shipment.

China imports mainly finished goods from Europe. These account for 87% of total imports and fallinto two main commodity groups: machinery and equipment 57.2%; and power and electricalequipment 34%. These are also containerised cargoes.

The structure of Chinas trade with the CIS is somewhat different. Chinas main exports to the CIS

are finished products. Textiles account for 28.5% of total exports, power industry equipment formore than 12%, household items for nearly 10%, office equipment for 9% and cars for 6%.

Chinas main imports from the CIS are fuel and energy products (over 61%), agricultural rawmaterials (16%), chemical fertilisers (nearly 11%) and metals (4%). These bulk cargoes have to beshipped in on flat-trailers rather than in containers.

South Korea has a strong export bias. Data on South Koreas foreign trade is summarisedin Table 3.

Agricultural produce Fuels and minerals Finished goods

Figure 3.Structure of Chinese exportsto Europe, 2007

Source: WTO (2008)

CommodityTotal trade Europe CIS

Export Import Export Import Export Import

Agriculturalproduce

6.32 22.04 0.36 1.85 0.35 0.76

Fossil fueland minerals

33.82 126.58 1.39 2.30 0.09 5.46

Finished goods 330.41 206.09 59.60 35.46 10.87 1.72

Including:

Metals 18.82 21.45 2.53 1.44 0.18 0.99

Chemicals 37.54 32.34 2.69 6.59 1.15 0.37

Office equipment 92.69 45.62 16.79 2.70 1.23 0.02

Transportequipment

78.99 13.68 21.15 4.42 6.46 0.05

Textiles 10.37 4.14 1.13 0.46 0.22 0.02

Cloths 1.91 4.32 0.29 0.48 0.02 0

TOTAL: 371.48 356.84 61.57 40.70 11.31 8.01

Table 3.South Koreas commoditytrade with Europe

and the CIS in 2007($ billion)

Source: WTO (2008)


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South Koreas exports and imports may seem modest compared to Chinas trade with Europe andthe CIS; however, the structure of commodities traded must be taken into account.

As shown in the above table, finished goods dominate Korean exports to Europe, accounting for97% of the total. The main commodity group, machinery and equipment, accounts for 73% oftotal exports in monetary terms. Breaking this group down further, cars are the main machineryexport (over 34%), followed by spare parts and components for overseas assembly of certain carmakes (about 15%). Another large commodity group is office equipment (24%). Power industryand electric equipment account for 7% of total exports. This makes it likely that practically allSouth Korean exports are containerised and shipped to Europe by sea. This is logical, since thecountry needs to ensure optimal use of the loading capacity of its sea ports. The transshipmentstatistics of the countrys main sea port confirms this conclusion.

In addition, South Korea imports some finished goods. Mechanical engineering goods account for51% of all imports, mainly comprising European equipment which Korean companies are as yetunable to manufacture, such as printing industry equipment, instrumentation, etc.

Chemicals account for about 16% of Koreas imports. Various goods make up the rest of the total,including fuel and raw materials for Korean industry.

Trade with CIS countries totals $19.3 billion, with Korean exports totalling $11.3 billion. The exportstructure is basically the same as for Europe: cars and spare parts account for 57.2%, but the shareof office equipment is much smaller ($1.2 billion or 11%). Chemicals account for about 10%. Fueland energy products dominate South Koreas imports from the CIS (68.3%). Another large importsgroup is metals and iron ore (12.5%); the remaining imports are insignificant.

Analysis of cargo flows between China and South Korea on the one hand and Europe and the CISon the other has enabled us to identify the following specific features:

these Far Eastern countries trade with Europe principally in finished goods which can becontainerised. This suits both parties, since they each have the capacity to:

a) employ multimodal technology, including door-to-door delivery;

b) ship by sea, which enables them to simplify formalities, use uniform waybills, and easilytrack the movement of cargoes; and

c) apply transparent tariffs which can be announced in advance and remain stable. This isdiscussed in more detail below.

It is important not to overlook other Southeast Asian countries2 that supply commodities toEurope. However, for technical reasons,Eurasian land transport corridors can potentiallybe used only by China and South Korea. Japan uses Russian ports in the Far East for tradewith Russia, otherwise all Japanese exports to Europe are shipped by sea. In recent years, thetransit of Japanese cargoes via Russia has been almost totally abandoned, for reasons which we

discuss below.

Indias foreign trade has expanded considerably over the last few years with an annual increase inexports of around 19% each year since 2000. In 2007, India earned $145 billion from the export ofvarious commodities, including $34 billion from sales to Europe, and $2 billion from the CIS. Indianshippers may be persuaded to use IndiaIranRussiaEurope routes. Traditionally, shipmentsfrom India and Iran to Europe have been transited via Russia. Volumes carried via Belarus areinsignificant.

Currently there is no Indian freight transit via the Caspian along the North-South ITC. All cargoflow is through the Suez Canal. The port of Mumbai is expanding rapidly. Indian, European andAsian shipping companies are successfully transporting cargo to Eurasia by sea using establishedsystems. Notwithstanding the North-South ITC Agreement of September 2000, freight forwardersare showing little interest in the proposed new routes. In 2007 the Caspian Sea port of Olya, which

2SoutheastAsiancountriesalsoincludeBrunei,EastTimor,Vietnam,Indonesia,Cambodia,Laos,Malaysia,Myanmar,Singapore,Thailand,TaiwanandthePhilippines.


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is assigned a key role in servicing the North-South ITCs cargo flow, transshipped only 435,000tonnes at its terminals. When the ITC Agreement was signed in 2000, Olya was expected to behandling 3 million tonnes annually within five years.

2.4. Review of potential cargo flows along China-Western

Europe overland routes via CIS countries

Practically all the goods traded between the EU and the APR are being shipped by sea. Therefore itis important to assess the potential volume of cargo flows along the CIS overland routes.

In 2007, 17.7 million TEU were transported from Asia to Europe, and 10 million TEU from Europe toAsia. The difference of 7.7 million TEU represents empty containers returning to their point of origin.However, container shipment via the Suez Canal is limited. According to UN ESCAP (2007:39), by2015 containerised transportation from Asia to Europe and from Europe to Asia will reach 26.1

million TEU and 17.7 million TEU respectively, and the Suez Canal is expected soon to reach itsmaximum capacity for container vessels. Using the alternative sea route via the Cape of GoodHope is more expensive. In 2005, Kazakhstan received 142,000 TEU of import and transit cargoesand shipped 25,000 TEU of exports. In 2015, these figures will increase to 126,000 and 138,000TEU respectively (UN ESCAP 2007:40).

Containerised shipments from China to EurAsEC or Kazakhstan are essentially transit cargoes.They enter via the Dostyk-Alashankou border crossing point. According to the Kazakh press, in2008, the daily throughput at Dostyk-Alashankou was 520-550 rail cars, although a high of 620 railcars has been recorded recently. Some 70% of this freight is containerised. Most trains consist of48-50 rail cars, including container wagons. We estimate that Dostyk can transship about 306,000TEU annually. However, this figure has not yet been achieved. According to Kaztransservice, theofficial container operator owned by Kazakhstan Temir Zholy (KTZ), Dostyk transshipped 109,677TEU in 2007, including 74,551 TEU from China and 35,126 TEU to China. Compared with 2006, these

figures were up by 37%, 40% and 31% respectively (SPECA 2007).

Kaztransservice forecasts that by 2015 the transshipment of containers at Dostyks railway terminalalone will reach 730,000 TEU, i.e. 2.5 times the current throughput (see Figure 4). The Kaztransserviceforecast is, however, much more optimistic about the future of container transportation than UNESCAP. Nevertheless, there is a consensus that transshipment volumes will grow considerably inthe medium term, which justifies the development of overland transport systems.

The port of Lyanyungang (the destination point of the railway line via Dostyk) transshipped 2million TEU in 2007 and 3 million TEU in 2008. Therefore, it is safe to assume that cargo flows fromChina will merit investment to increase capacity at Dostyk and construct a new border crossingpoint at Khorgos.

Figure 4.Transshipment of containersat Dostyk (thousand TEU*)

Source: *forecast by

Kaztransservice


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Box 1. Main commodity groups that can be transported by Eurasian routes (ChinaWest Europe)

Export and import shipments between China, Russia and Western Europe are largely transported by sea. Chinas export-

orientated industries are concentrated in coastal areas. For example, nearly all industrial output from Guangdong, Fujian

and other provinces around Shanghai is transported by sea, with export logistics designed accordingly. Most home

electronics brands are manufactured in Hong Kong, and members of the Russian Association of trading companies and

manufacturers of consumer electronic and computer equipment, such as Skarlett, Binatone and Vitek, transport these

products from Hong Kong only by sea. These goods are then distributed throughout the CIS.

Chinas main shipping centres are in the south of the country, the Pearl river delta, and the Shanghai region. None of these

regions has a particular specialisation, although there are differences between them. For example, South China produces

more shoes and electronics, whilst Shanghai produces more clothes and toys. Northern provinces are historically home

to many heavy industrial facilities, and local railways there mainly serve this sector. Therefore, opportunities to increase

container transportation from these regions to EurAsEC are extremely limited. This problem applies even for backhaulloading: CIS exports to China are such that there is simply nothing that can go by container. Metal goods are no longer

an option, since China itself has started to export them.

Commodities which can be transported by road and rail from China (including the XUAR) to Kazakhstan and Russia

include:

chemicals, including hazardous loads;

foodstuffs (perishable) and other restricted cargoes;

instrumentation;

stereo, video and audio systems;

mobile communications equipment;

TV sets;

electrical goods;

electric cables;

furniture;

clothes and shoes;

cosmetics.

The following commodities can be considered as possible backhaul road transport cargoes moving from Europe to

China,

industrial and agricultural equipment;

metals (high-value non-ferrous metal goods, higher-purity metals and other high-value goods which are usually

purchased in small quantities);

integrated circuits;

various fine chemical products and polymers;

consumer goods; foodstuffs (e.g., meat).

Certain cargoes, such as bearings, are not suitable for sea transportation without expensive specialised and costly

packaging to protect them from the sea air.

Analysts estimate that revenue from freight transit between Europe and Asia exceeded $50 billion in 2007 andcould reach $80 billion in 2015 if current increases in cargo turnover continue. However, sea-shipping companiesearned nearly all this revenue, since 98% of transit cargo is transported between the EU and the APR by sea throughthe Suez Canal.

In other words, transit potential is not being utilised. In this paper we will attempt to identify the measures thatmust be taken in order to make the regions ITCs a viable source of transit revenue for EurAsEC countries. This

problem has become even more pressing since the startup of Chinas Go West The Xinjiang Uigur AutonomousRegion (XUAR) development programme, which is designed to increase the manufacture of goods for export toEurope, potentially using EurAsEC overland routes (see Box 2).


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Box 2. The XUAR and transit to Western Europe

The XUAR is one of Chinas largest regions; it borders eight countries. Its population exceeds 19 million. Economic

growth averaged 11.2% per annum in the last decade. The XUAR produces gas, oil, coal, cotton, fruit, vegetables and

fertiliser. Over 60 large facilities are now under construction costing more than $100 billion. 91,000km of new roads and

4,070km of new railways have been built. The administrative centre, Urumqi (population 2 million), has become a major

transshipment centre, receiving consumer goods from all over China and shipping them to Central Asia, Russia and

Europe. Over 90% of these goods are manufactured in inland China.

The XUAR exports textiles, shoes, mechanical engineering products and electronics (industrial goods account for 67%

of all exports), and imports oil, iron ore and copper ore. According to Chinese statistics, the XUARs own production

accounts for less than 10% of its exports, and the region consumes around 20% of its imports. Trading with the XUAR

means trading with the whole of China through its western gate.

The Peoples Government of the XUAR and the ADB have signed an agreement under which the bank will extend a $100-million loan to fund the development of transport infrastructure in Altay, Kuitun, Changji, Turfan and Hami. Prior to this,

in April 2006, the ADB had loaned the XUAR government $150 million to develop transport in the cities of Tacheng and

Yining and around the Alashankou border crossing point.

Special economic zones (SEZ) are being established to encourage trade; these zones offer advantageous terms to

businesses. The construction of roads is an important part of the creation of SEZs. To date, the XUAR has 16 border

motorways with a total length of 1,676 km. Border SEZs are all connected to railway networks such as Dostyk, the only

Sino-Kazakh railway border crossing point. Motorways and road transport are used increasingly.

It is estimated that, by 2025, the UrumqiYiningSary-Ozek railway will have an annual freight capacity of 25 million

tonnes.

In the first quarter of 2008, the foreign trade transactions of the XUAR totalled $13.7 billion an increase of 90.4%

compared with the previous year.

Trade with Western Europe accounts for 7.3% (about $1 billion) of the total commodity turnover. According to our

estimates, XUARs share of foreign trade between China and Western Europe will increase by 1-2% annually. The pace

of growth is slow because it is exceeded by demand for XUAR products from its neighbouring countries. The dollar-

denominated monetary value of trade with XUARs immediate neighbours will grow faster (about 15-17% annually) and

reach $2.1 billion within five years and $4.4 billion in ten years, according to Chinese estimates.

A few years ago the Chinese Government adopted a resolution on the industrial development of the XUAR. Its intention

was to strengthen the regions economic position by bringing in plentiful and cheaper labour, reducing political tensions

and relocating low-cost production facilities from other successful industrial regions to this relatively poor region.

Beijing believes that many consumer goods intended for Europe can be manufactured in the XUAR, which is geographically

closer to Europe. However, only a part of this vast volume of exports will be manufactured by the XUAR itself, and it is

understood that the lions share of goods will have to be shipped to Europe by sea from other more established zones of

production. Nevertheless, a certain proportion will be shipped directly from the XUAR. The Chinese Government hopes to

bolster XUARs industries and enhance trade with Central and Eastern Europe and the Russian Federation.

Chinas Leap Forwardunified transport strategy and Go West programme to develop its western provinces will have theeffect of increasing cargo flows to Europe via Kazakhstan and Russia.

The Go Westprogramme may lead to an increase in f reight transit via the regions ITCs, as is discussed below.

A new network of logistics centres is being planned for the XUAR, which will simplify cargo transportation to Central Asian

countries. By 2015, 21 logistics centres, with a total area of 2.12 million m2, will have been built in the XUAR, including in

the cities of Urumqi, Hami, Korla, Kashgar, Kuitun and Yining and the Khorgos border crossing point. In addition, by 2015

the XUAR will have around 280,000 lorries of its own.

Some commodities manufactured in the XUAR will be shipped via Kazakhstan. Delivery from China to western parts

of Russia will take about ten days one fifth of the journey time by sea. It is expected that an international border co-

operation centre will be opened in 2009.

We believe that the volume of land trade between the XUAR and Western Europe will be dictated by the technical capacity

of border crossing points. Based on the optimistic forecast by Kaztransservice that transshipment will reach 730,000

TEU in 2015, and assuming that shipments to Europe will remain at the current level of 70% of the total volume, weexpect that about 500,000 TEU will be transited to Europe annually.


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There can be no doubt that the vast transit potential of EurAsEC is, at present, very much underused.The current and potential transit cargo flows of non-CIS countries are negligible compared withtransit from and through EurAsEC countries to third countries, in quantitative terms (see Figure5). This is explained principally by the geographic locations of the main trading countries withinEurAsEC. For example, Russia, a major trading partner of the EU, mainly uses the territory of Belarusfor export to, and import from, the EU.

Figure 5.Existing and potentialcargo flows via EurAsEC(million tonnes).

Source: EurAsEC IntegrationCommittee estimates

Cargo flows

(million tonnes)

Transit from and

through EurAsEC

to third countries

Transit from third

countries to third

countries through EurAsEC

We believe that, although the current volume of transit originating outside EurAsEC is insignificant,fulfilling the transit potential of EurAsEC in this regard is an urgent priority. As the figures in Figure 5show, the EurAsEC Integration Committee forecasts that in 2020, transit from and through EurAsECcountries to third countries and back will total 300 million tonnes, i.e., six times more than in theyear 2000. In parallel with this, transit from third countries via EurAsEC will increase by 16 times

compared with 2000 to 16 million tonnes. Not only is the rate of growth of external cargo flowsexpected to be much more rapid, it should also be remembered that the main purpose of EurAsECas a regional organisation is to create a customs union, which will mean a reduction in and, in thelonger term, abolition of the customs duties on imports to member countries. Transit of externalcargo flow, however, could become a stable source of revenue for them.


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.1. The role of international transport corridors in EurAsEC

Any study of the role of transport corridors in transport systems (especially those which span morethan one country) should take into account the following:

transport corridors are trunk routes which, because of their comprehensive infrastructure andcommunication links, permit the use of multi-modal technology, multiple modes of transport andmulti-function terminals and transshipment facilities in a particularly advantageous location;

the operations of the transport corridor must be protected by a continually evolving legalframework and by international agreements (e.g., those pertaining to the use of standardisedwaybills which allow equal access to terminals and other infrastructure);

parties to the various conventions on ITCs agree to adopt modern customs technology toexpedite cargo and passenger transportation procedures; and

parties to conventions agree to develop transport infrastructure in their respective territoriesand support the provision of services to users which meet international standards.

Experience from elsewhere in the world should also inform policy. For example, the EU is currentlyworking towards ensuring interoperability and interconnectivity of different modes of transportalong its transport corridors.

Interoperabilityis dependent on the use of standard and compatible infrastructures, technology,utilities, equipment and vehicle dimensions. This ensures technical and operational uniformitywhich can be vital to the provision of door-to-door delivery services. This uniformity, just asimportantly, can help to eliminate the various barriers (institutional, legal, financial, physical,technical, cultural or political) between transport systems.

Interconnectivityis the horizontal co-ordination of various modes of transport in order to provideintegrated door-to-door delivery services. An essential prerequisite for such co-ordination is theprovision of transshipment/cargo transfer technology and equipment, complex surveillance andmanagement systems, and well-trained personnel.

There are several Eurasian trunk routes in EurAsEC member countries, but few of them actuallycorrespond to the definition of a transport corridor. In many documents, all Eurasian routesare referred to as corridors; by contrast, in the EU, where plans to create and develop transport

corridors have all been finalised, this term is used more carefully. Thus, the EU adheres to thedefinition of transport corridors adopted at the First and Second Pan-European Conferences onTransport (in Prague in 1993 and in Crete in 1994): an international transport corridor consistsof main transport communications (existing or under construction) with related equipment andinfrastructure which connect large traffic junctions, and employ various modes of transportfor international transportation of cargoes and passengers at the points of their maximumconcentration.

Cargo transportation along the regions inland waterways is technically difficult to implement on aviable scale. For example, in accordance with the 2003 Russian inland waterways code, any suchtransportation under the flag of a foreign state is subject to permits granted by the Russian Ministryof Transport. In addition, many hydraulic works on Russian rivers do not meet safety standardsbecause of channel silting, which makes the cost-effective transportation of cargo unfeasible.

Therefore, only railways and roads have decisive importance for transit in Eurasia. We discussbelow the main Eurasian overland transport corridors.


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.2. Pan-European corridorsIn this study we focus on the Pan-European corridors, since these routes, which extend to theUrals, are an easy way for Asian (primarily Chinese) commodities to reach Western Europe viaregional transport networks.

The origins of these international transport corridors can be traced back to the 19801990s,when Western European countries identified an urgent need to improve the EUs internal andexternal links in response to a rapid growth in traffic. In 1994, following the First and Second Pan-European Conferences on Transport, ten major transport routes, the Pan-European corridors,were created; these corridors provide optimum transport links between Western Europeancountries, the Baltic, the European part of the CIS (Moscow, St. Petersburg, Minsk, Lviv, Kiev), theBlack Sea ports (Odessa, Constanta, Varna) and Turkey (Istanbul):

I. Helsinki Tallinn Riga Kaunas Warsaw;II. Berlin Warsaw Minsk Moscow Nizhny Novgorod;

III. Berlin Dresden Wrocaw Lviv Kiev;

IV. Berlin / Nuremberg Prague Budapest Constanta / Thessaloniki / Istanbul;

V. Venice Trieste / Koper Ljubljana Budapest Uzhgorod Lviv;

VI. Gdask Warsaw Katowice ilina;

VII. the Danube;

VIII. Durres Tirana Skopje Sofia Varna;

IX. Helsinki St. Petersburg Moscow Pskov Kiev Chiinu Bucharest

Dimitrovgrad Alexandroupolis;X. Salzburg Ljubljana Zagreb Beograd Ni Skopje Veles Thessaloniki.

Three Pan-European corridors extend into Russia and one into Belarus. These corridors cantherefore be linked with other EurAsEC countries. In 1997, they were all extended through Russianterritory linking the following destinations:

Baltic (St. Petersburg) Centre (Moscow) Black Sea (Rostov-on-Don, Novorossiysk);

Moscow Astrakhan;

West (BerlinWarsawMinsk) Centre (Moscow) Nizhny Novgorod the Urals(YekaterinburgChelyabinsk);

Northern Sea Route (St. PetersburgMurmansk and further eastwards by sea);

Waterway from the Black SeaAzov region through the Volga-Don Canal to the Caspian.

Of special interest in the EurAsEC context is the II Pan-European Transport Corridor which extends1,830 km from Berlin to Nizhny Novgorod via Warsaw, Minsk and Moscow. It will be fully operational

by 2010. Presently, the East Windcontainer service links Berlin with Moscow.

The II Pan-European Corridor is important not only to Russia and Belarus, but also to other EurAsECcountries involved in cargo transit between the APR and Western Europe. Using this corridor,Kazakhstan and Russia can offer transport services in the ChinaWest Europe direction (theseservices can be used by Japan, South Korea, Malaysia, Indonesia, Singapore, Thailand and othersas well as China). For many years, shipments in that direction have been made along the Moscow Yekaterinburg Omsk Novosibirsk Irkutsk transport corridor which provides access to theports of Nakhodka and Vanino and to China via Zabaikalsk, Grodekovo and Naushki. With theopening of the Druzhba-Alashankou Sino-Kazakh railway border crossing point in 1992, journeysin this direction were shortened dramatically: for example, the journey from Moscow to the port ofLianyungang (China) is now 670 km shorter, and from Moscow to Hong Kong 860 km shorter thanthe previous route via Naushki. In addition, this route can be used for shipments from Kyrgyzstan,

Tajikistan, Turkmenistan and Uzbekistan to Moscow and beyond through the II Pan-Europeancorridor to Europe. Cargoes include cotton, the staple export commodity of these countries, andoil from Kazakhstan, Uzbekistan and Turkmenistan.


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Figure 6. Pan-European corridors. Sourse: European Union


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.. Railway corridorsThanks to the extensive railway network spanning the territory of the former Soviet Union, railwaytransport corridors have always played a key role in plans to maximise the transit potential ofEurAsEC. International shipments account for 90% of Russias total railway cargo revenues and72% of those revenues in Kazakhstan.

The general opinion today, reflected in the declarations of the 1998, 2000 and 2003 St. PetersburgEurasian Conferences on Transport which were attended by ministers of transport from manyEuropean and Asian states, is that, technically, the following railway routes are suitable for cargotransportation in Eurasia:

The Trans-Siberian Railway (Brest Minsk Finnish border Ukrainian border Moscow Yekaterinburg Novosibirsk Vladivostok Ulan-Bator Beijing);

The Northern Trans-Asian Corridor (Chop Kiev Moscow Chelyabinsk Dostyk Alashankou Lianyungang);

The Central Trans-Asian Corridor (Kiev Volgograd Almaty Aktogai Dostyk Alashankou Lianyungang);

The Southern Trans-Asian Corridor (Istanbul Ankara Tabriz Tehran Mashad Seraks Tashkent Almaty Aktogai Dostyk Alashankou Lianyungang); and

TRACECA (Constanta Varna Ilyichevsk Poti Batumi Baku Tashkent Almaty Aktogai Dostyk Alashankou Lianyungang).

The multi-modal North-South ITC which links northwest Europe and Scandinavia with Central Asiaand the Persian Gulf has also become much more important as a result of the rapidly expandingtrade between Europe and India. This route relies on the extensive transport networks of Russia,

Iran, Kazakhstan and other countries.

The corridor running from the port of Bombay to St. Petersburg is 7,200 km long. In the Caspianregion, several routes are open to cargo transit: the trans-Caspian sea route, the inland Caspian-Volga-Baltic waterways which extend to the Volga-Don Canal and the Black Sea, and a number of


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railways and motorways. The Russian Ministry of Transport estimates that, in the long term, up to10 million tonnes of cargo could be transported via these routes annually, excluding oil products(Russian Ministry of Transport, 2002).

Below we discuss cargo traffic along these ITCs in more detail.

1. For decades, the Trans-Siberian Railway has been the principal railway link between EuropeanRussia and its industrial regions to the east (Siberia, the Urals, etc.). The TSR is 9,288 km long;it was completed in 1903 and fully electrified by 2002. It has a number of branch lines in its fareastern section which link to Chinese, North Korean and Mongolian railways, central Eurasia (i.e.,to Central Asian railways via Kazakhstan) and Europe (to Western European railways via Belarus).Currently, the TSR is technically capable of carrying 250,000-300,000 TEU of international transitcargoes per annum. Once the modernisation of the TSR is complete, and if the Baikal-Amur Mainline(BAM) railway is used, this figure may increase to 1 million TEU per annum. RZD has pledged to invest

about 50 billion roubles ($1.5 billion3

) in the modernisation of the TSR up to 2015, primarily to allowit to handle special container traffic.

The TSR has the technical capacity to carry up to 100 million tonnes annually, which would includeabout 200,000 TEU of international container transit from the APR to Europe and Central Asia.Currently, the TSR is used by fifteen container services (see Figure 7).

Figure 7.Journey timesof Trans-Siberian Railwayservices

Moscow, 12 days

Smolensk, 13 days

Zabaikalsk

Brest, 12.5 days

Buslovskaya, 9.5-11.5 days

Berlin, 14.5 days

Chop, 13.5 days

Lokot, 8 days

Naushki, 5 days

Avtovo, 9.5 days

Nakhodka Vostochnaya

3Hereinafter,attheexchangerateof01.01.2009.

Container freight trains can travel about 1,200 km per day on the TSR. As a result of the simplificationof customs procedures at ports and border posts, transit containers wait just a few hours forclearing compared to 3-5 days in the past. The TSRs simplified customs and checking proceduresfor containerised commodities also apply to all containers shipped to third countries, regardlessof destination.

2. The northern trans-Asian corridor is viewed as the second most developed corridor after theTSR. In some UN ESCAP documents, this corridor is referred to as the second Eurasian overlandbridge. It runs from Lianyungang through central and northwest China, Kazakhstan and Russia toWestern Europe. The distance from Lianyungang to Rotterdam is 10,900 km. The corridor is beingdeveloped on an ongoing basis. It is 2,500 km shorter than the TSR and 10,500 km shorter thanthe sea route.

After 1992 the Chinese section of this railway (some 4,150 km) was partially modernised. To date,

89% of its total length is double track, and 29% of the line is electrified. It is expected that, with


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the industrial development of northwest China, this route will be made double track along itsentire length, and electrification will be extended.

China and Kazakhstan use different gauges 1,435 mm and 1,520 mm, respectively. This poses amajor problem for the development of freight transportation, since containerised cargoes have tobe reloaded by crane.

At present, the Dostyk rail freight terminal in Kazakhstan, at the Sino-Kazakh border, is capable ofhandling a maximum of 620 rail cars per day. Until recently, maximum capacity barely exceeded500-550 rail cars per day. The depots current throughput is 12 train pairs per day on the Chinesenarrow-gauge line. According to preliminary estimates, the depot handled a total 14 milliontonnes scheduled cargo in 2008. Now, new handling terminals are being constructed and eight ofthem are already complete. Each of these terminals is designed to handle certain cargoes: heavymachinery and equipment and packaged, bulk or containerised cargoes. Dostyk services containershipments, which constitute about 70% of all cargo traffic. It has been calculated that this bordercrossing point must be capable of handling over 300,000 TEU annually. Compared with 2007,container traffic in 2008 was up by 30%. Typically, containerised cargoes are shipped to the Baltic,CIS and European countries.

3. The central trans-Asian corridor runs from the Sino-Kazakh border via Dostyk to Almaty andon to Ukraine. This is the shortest route from Asia to Central Europe. It is double-track and electrifiedwithin the former Soviet Union and it provides access to Poland via Jagodin and Mostiska and toSlovakia and Hungary via Chop.

4. The southern trans-Asian corridor incorporates only one EurAsEC member country Kazakhstan. However, this railway is enlisted here as a potential competitive route. It also startsfrom Lianyungang, and passes through Dostyk, Almaty, Tashkent, Iran and Turkey before reachingthe Mediterranean and Black Sea ports. But this railway also has the problem of different gauges.Transshipment is required at two points, which increases delivery costs and slows down traffic;hence the key advantage of overland trans-Eurasian routes over sea shipment, i.e., speed ofdelivery, is lost. The Iranian part (2,010 km) is single track and not electrified. In Turkey, trains haveto cross lake Van by ferry. Along the branch lines to Istanbul (i.e., the Mediterranean) and Samsun(Black Sea), only 46% of the railway is electrified, and only 10% is double track.

5. TRACECA. This project includes the Dostyk Tashkent Ashgabad Turkmenbashi Baku Tbilisi Poti section and ferry lines to Odessa, Varna, Constanta and Istanbul. Despite the EUsenthusiasm for this project at an early stage, TRACECA failed to achieve its design capacity duringthe fourteen years after relevant documents were signed. We discuss the reasons for this below.

Parties to TRACECA signed a number of documents relating to certain benefits and reduced tariffs,e.g. a 50% discount on rail freight and ferry transportation of empty wagons. In addition, taxes andfees on transit cargoes were abolished, and measures were taken at national level to enhance thesafety of passengers, cargoes, carriers and vehicles.

However, despite all these measures, the economic efficiency of this route is in doubt.According to preliminary figures, all other conditions being equal, the tariffs charged by RZD fortransporting grain, cotton and containers are 1.7 times lower than those of TRACECA, and 1.2 timeslower for oil and non-ferrous metals. In addition, transportation via Russia gives 1.8-fold journeytime advantage. Cargo is shipped mainly from west to east, with mostly empty wagons travellingin the opposite direction. This has a negative effect on the efficiency of Caspian and Black Seaferry lines.

At the moment, some sections of TRACECA are used to transport oil and oil products fromTurkmenistan, cotton and grain from Uzbekistan, etc. At the port of Poti, a grain terminal with anannual capacity of 1.5 million tonnes, a container terminal with an annual capacity of 200,000 TEU,and large storage facilities are all under construction.

According to experts, the potential capacity of the Batumi Poti Ilyichevsk ferry line is 15-20million tonnes per annum. However, its annual throughput at the moment is no higher than 0.9million tonnes (using two ferries). The Baku Turkmenbashi ferry line handles up to 2 milliontonnes annually (five ferries).


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Figure

8.

TRACECA.

Source:EuropeanUnion


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Box 3. The TRACECA Programme

This Programme was adopted at a conference held by the EU in Brussels in May 1993, which was attended by representatives

from Georgia, Azerbaijan, Armenia, Kazakhstan, Uzbekistan, Turkmenistan, Kyrgyzstan and Tajikistan (Ukraine and

Mongolia joined later). This Programme aims to develop a transport corridor from Europe to Central Asia through the Black

Sea, the Caucasus and the Caspian. It incorporates the Poti (Georgia) Varna (Bulgaria), Poti Burgas (Bulgaria), Poti

Odessa (Ukraine) and Baku (Azerbaijan) Turkmenbashi (Turkmenistan) ferry lines. In addition, the new ferry routes of

Poti Constanta (Romania) and Batumi (Georgia) Novorossiysk (Russia) will be opened and a new Kars (Turkey) Tbilisi

(Georgia) railway section is to be built. Nine railway ferry complexes will be operated in the Black Sea region. The design

capacity of TRACECA is up to 40 million tonnes per annum.

Currently, TRACECA is used to transport oil and oil products from Turkmenistan and cotton and grain from Uzbekistan. It is

expected that Chinese freight transport will also access this route from the Trans-Asian mainline.

TRACECA distances (sections in use):

Tashkent Brest 4,200 km;

Tashkent St. Petersburg 4,000 km;

Tashkent Bandar Abbas 3,900 km;Tashkent Odessa 4,230 km;

Tashkent Batumi 2,900 km.

The main advantage of this corridor is that it begins at the Black Sea ports where several of the Pan-European corridors end.

The countries through which it runs were keen to be used for freight transit. To implement the TRACECA Programme, the

countries involved signed the Multilateral Agreement on the Development of TRACECA on 8 September 1998 in Baku. The

reasons that the Programme failed to achieve target capacities are discussed above.

Box 4. Outlook for the development of container traffic

Belarus has two major railway links with Europe: Minsk to Brest, and Minsk to Vilnius, Kaunas and Klaipeda. The Smolensk

Vitebsk Daugavpils Riga Ventspils railway also runs through Belarus. From Ukraine, this railway follows theBakhmach Gomel Bobruysk Minsk route before entering Lithuania.

Belarus railways have a total length of 5,500 km. The following east-west-east, high-speed services operate there:

East Wind(Berlin Minsk Moscow); In 2007, the railway carried 7,580 TEU freight, and was 1.9-times faster than in2006;

Mongolian Vector(Brest Naushki Mongolia China); 657 TEU handled in 2007 (1.4 times faster than in 2006);and

Kazakhstani Vector(Brest Iletsk Arys), 9,320 TEU carried in 2007 (1.2 times faster). In the near future this servicewill be extended to Dostyk and China.

In 2007 the Belarusian railway carried 2,179 containers from east to west (100.6% of the 2006 figure) and 16,782 containers

from west to east (133.8% of the 2006 figure).

However, these statistics alone do not give the complete picture. Although container traffic undoubtedly increased, it

remains insignificant compared with the traditional raw material cargo traffic, which still predominates in this region.

Railway transportation between Russia and Kazakhstan (the key players in the proposed EurAsEC transit project) is

growing steadily: in the first nine months of 2008, export and import shipments totaled 77.2 million tonnes, an increase

of 17% (11.1 million tonnes) compared with the same period of 2007. This figure includes exports to Kazakhstan (18.3%),

imports from Kazakhstan (53.5%), goods in transit to Kazakhstan (4.1%) and goods in transit from Kazakhstan (17.5%).

Container traffic between Russia and Kazakhstan during the first nine months of 2008 totaled 137,400 TEU (a 6% increase

compared with the previous year).

By extrapolating these figures to the end of 2008, we estimate that in 2008 container traffic in both directions totalled

about 180,000 TEU. According to preliminary estimates, about 39,000 TEU will be transited in both directions. About

31,000 TEU will be transited from Kazakhstan to Russia. Since this is cargo coming in f rom Dostyk, containerised Chinese

cargo is expected to account for around 20% of total freight transit via Kazakhstan to Russia (Kaztransservice is expected

to handle 200,000 TEU at Dostyk in 2008, i.e., twice the 2007 total).


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Figure 9. Main railways. Source: Kazakhstan transport and communications research institute (NII TK),International freight forwarding company Transsystem.


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.4. Motorway corridors

Public and private road transport services carry between 59% and 80% of all freight shipments inEurAsEC countries. The following intercontinental motorway routes are particularly important forthis traffic:

1. Asian Highways are international routes which pass through more than one sub-region, e.g.,East and Northeast Asia, South and Southwest Asia, Southeast Asia, and North and Central Asia.Internal sub-regional routes link neighbouring sub-regions. Internal roads in each country provideaccess to capital cities, major industrial and agricultural centres, airports, sea ports and river ports,major container terminals or depots and tourist attractions.

Russias economic and transport links with Kazakhstan and other EurAsEC countries, and transitlinks from Europe to Asia, rely principally on the following motorways which, according to UNESCAP classification, are parts of the Asian Highway network:

AH7 (Yekaterinburg Chelyabinsk Troitsk Kostanai Astana Karaganda Burubaital Merke Chaldovar Kara-Balta Osh Andizhan Tashkent Syrdarya Khavast Khudzhand Dushanbe Lower Pyandzh Shirhan Polekhumri Jebul Sarej Kabul Kandahar Spinboldak Chaman Quetta Kalat Karachi);

AH60 (Omsk Cherlak Priirtyshskoye Pavlodar Semipalatinsk Taskesken Ucharal Almaty Kaskelen Burubaital);

AH61 (Kazakh border Ozinki Saratov Borisoglebsk Voronezh Kursk Krupets Ukrainianborder);

AH63 (Samara Kurlin Pogodayevo Uralsk Atyrau Beineu Oasis Nukus Bukhara Guzar);

AH64 (Barnaul Veseloyarsky Krasny Aul Semipalatinsk Pavlodar Shiderty Astana Kokchetav Petropavlovsk);

AH70 (Ukrainian border Donetsk Volgograd Astrakhan Kotyayevka Atyrau Beineu Zhatybai ( Aktau) Bekdash Turkmenbashi Serdar Gudurolum Inche-Boroun Gorgan Sari Semnan Damghan Yazd Anar Bandar Abbas).

The following roads link China with the borders of EurAsEC countries

AH5 (Shanghai Nanjin Sinyuan Siang Urumqi Kuitun Jinghe Khorgos). This two-lanemotorway is 4,815 km long.

It has two branches:

AH67 (Kuitun Baketu), a 390 km long, two-lane motorway

AH68 (Jinghe Alashankou), 94 km long.

2. The Western EuropeWest China project (a proposal involving EBRD, ADB, WB, IDB, UNDP

and others) is 8,455 km long. About one quarter of the highway will be laid in Kazakhstan, and willallow transit not only to Russia and China, but also to South Asian countries via Uzbekistan andKyrgyzstan. The project is expected to cost around $2.3 billion.

3. NELTI (New Eurasian Land Transport Initiative) will facilitate the movement of cargo to theCIS, the EU and the United States along the Beijing Urumqi Bakhty Astana Moscow Riga Vilnius Warsaw Berlin Brussels route. This project is expected to increase cargo transitalong the international motorways of Kazakhstan and Russia to 5.2 million tonnes per annum.

The NELTI is receiving wide media coverage. We believe, however, that its significance may beoverestimated, and explain our reasons below.

In Russia, international road transport is increasing steadily and now accounts for up to 26% of allforeign trade shipments (transportation of high-value cargo). Russias international road transport

market is estimated to be worth roughly $3-3.2 billion.Analysis of the international road transport market by direction of travel reveals some interestingstatistics. Taking the EurAsEC member countries of Belarus and Kazakhstan, the ratio by direction


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Figure

10.

Motorwaycorridors.

Source:Kazakhstantransportandcommunicati

onsresearchinstitute(NIITK).


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0

will be 3.5 to 1. This is unsurprising, since most trucks arriving in Belarus head for Western Europeand the Baltic countries. Freight moving from Russia to Kazakhstan by road does not exceed 1.3million tonnes.

Foreign haulage firms operating in Russia account for a substantial percentage of Russias roadtransport market, as follows: Belarus 15%, Finland 8% (mainly timber), Ukraine 7%, Poland 7%, Lithuania 6%, Latvia 4%, Germany 0.2%, Italy 0.03%.

In our view, there are significant obstacles to the development of road transit through EurAsEC toWestern Europe. Firstly, it is very expensive for vehicle owners to operate in EurAsEC countries. Fora journey to be profitable, a truck must be able to cover up to 1,000 km during daylight hours. Thisrequirement applies in Europe, therefore if a European carrier is contracted to undertake a transitshipment, special tracking systems will not allow it to travel at night for safety reasons. This isbecause of the poor state of road surfaces and the road network in general.

The high cost of operating in EurAsEC countries is also due to the following: road transport is extremely inefficient in these countries. According to experts, its average

efficiency is four times lower than in developed countries;

the road transport fleet consists mainly of old and obsolete vehicles, which do meet specificrequirements for cargo or other operations;

logistics systems are not sophisticated enough to co-ordinate multi-modal shipments efficiently;and

cargo handling centres on long-distance routes lack the technology to handle large vehicles, andthere has been a disproportionate increase in the operation of smaller vehicles in this sector.In addition, there is no spot freight system in place which could ensure that empty vehicles dohave loads to transport


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Despite the transit potential of EurAsEC member countries (primarily, Russia, Kazakhstan andBelarus), and the existence of a system of international transport corridors (including railwaysand motorways), the fact remains that transit is not taking off: in the context of annual traffic fromNortheast and Southeast Asia to Europe of over 17 million TEU, the several tens of thousandscontainers being shipped via the ITCs of EurAsEC are insignificant.

Table 4.Aggregate transit potentialof EurAsEC member countries(million tonnes)

Source: EurAsEC IntegrationCommittee estimates

2006

20062020

Belarus 100 50 (50%) 150

Kazakhstan 36 10 (28%) 100

Kyrgyzstan 3.8 1.9 (50%) 6.5

Russia 80 54 (68%) 150

Tajikistan 0.2 0.18 (90%) 0.5

Aggregatepotentialof EurAsEC

220 115.8 (51%) 470

The EurAsEC Integration Committees estimate of aggregate4 potential transit capacity (see Table4) shows that EurAsEC countries are, in some cases, a long way from utilising this capacity tothe full. Since total potential capacity in 2006 is expected to double by 2020, the most urgentquestion is whether or not EurAsEC will be able to exploit this opportunity properly. What are thereal causes of the huge gap between current usage and full capacity?

4.1. Sea vs land: 2:1

The competitiveness of any freight route is commonly calculated using the trio of commercialindicators: timeservicetariff. The key reason for the failure to attract transit business tooverland EurAsEC corridors is the undeniable commercial benefits of using sea freight from theeastern and southern provinces of China and other Southeast Asian countries.

The main competitive advantages that sea transit routes have over overland routes are:

Cheaper tariffs: international shipping companies with an extensive and cost-efficient fleetat their disposal can keep their port charges and freight rates low (over the past decade, seafreight volumes have increased by half). In many cases, shipping cost is the main consideration forconsignors as they strive to minimise the transportation component of the price of commoditiesin order to keep them competitive in the destination country. Following the recent 90% drop inthe Baltic Dry Index, which is used in pricing raw material ocean freight rates (oil, metals, grains,etc.), the tariffs charged by shipping companies, at least in the near future, will be much morecompetitive than other modes of transport.

4Aggregatetransitpotentialmeanstheaggregatepotentialoftherailway,motor,sea,inlandwaterandairtransport


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2

Box 5. Sea and rail container freight tariffs in Eurasia (ATC AIR Service data)

Destination portUSD/container Delivery time,

days20DC 40DC 40HC

Hamburg 1475 2500 2650 26

Kotka 1620 2700 2800 32

Tallinn 1925 3240 3415 32

Riga 1925 3300 3475 32

Klaipeda 1925 3300 3475 32

Novorossiysk 2025 3750 3875 32

St. Petersburg 1980 3170 3270 32Vladivostok 1350 1950 1950 10

These ocean freight rates can be compared with the rail freight rates offered to the same company. Transportation is by

TSR; destination Moscow:

DestinationUSD/container Delivery

time, days20DC 40DC 40HC

Moscow 3585 6510 6510 15

The insurance surcharge is $300-550 per container (depending on the customs code of the commodity).

These tables show that sea shipping costs are around 50% lower than rail freight.

Loading port:Shanghai

However, the above appears to be true only for eastwest transit. For north-south traffic, whichis the other main direction for transit through EurAsEC countries, analysts believe that overlandtransportation costs can compete with sea freight. According to estimates, it costs $3,500 to deliverone tonne of cargo from Germany to India through the Suez Canal, and takes 40 days. Containerfreight along the North-South ITC will cost $2,500 and take 15-20 days (Eurasian Transport Union,2003).

Customer service and compliance with international quality standards: in addition totheir competitive rates, sea shipping companies offer a high standard of service, including cargotracking, sophisticated logistics networks and guarantees of on-time and secure delivery. They usestate-of-the-art technology, offer discounts to regular customers, etc.

However, overland transit has an important competitive advantage it reduces delivery times. Theshortest cargo delivery time from eastern China and other Southeast Asian countries to WesternEurope by railway or motorway via EurAsEC countries is 2 to 2.5 times shorter than sea shipmentvia the Suez Canal. This advantage is less apparent, however, where delivery time is calculatedon a cumulative basis for large shipments. For example, the average container capacity of vesselsworking on Asia-Europe routes increased by 30% to 7,100 TEU between 2004 and 2007. Accordingto KTZ, in 2007, an average container train was able to carry up to 270 TEU.

However, simple calculations alone are not sufficient in demonstrating the advantages of overland

transit. Shorter delivery time is a critical factor for certain cargoes (perishable goods or urgentdoor-to-door shipments). In addition, faster delivery means quicker receipt of cash from thebank, shortening transaction times. In certain cases, each day that payment is delayed is critical,


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Evgeny Vinokurov, Murat Jadraliyev and Yury Shcherbanin (2009) The EurAsEC Transport Corridors.Sector Report no. 5. Eurasian Development Bank

and consignors prefer shorter delivery time to lower shipping cost. Expediting delivery releasesconsiderable financial resources, which are effectively frozen throughout the cargos journeytime. Therefore, we view the time factor as an unquestionable competitive advantagethat overland routes can offer for certain commodities, customers and even regions(e.g., Chinas rapidly developing XUAR, which has no viable alternative to rail and roadtransit).

4.2. Barriers to fulfilling the regions transit potential

Given their geographic location and national economic interests, Russia, Kazakhstan and theirneighbours have a direct interest in the Eurasian integration process extending beyond theboundaries of the post-Soviet space and involving the most important countries in the region.Projects being implemented in certain economic sectors provide solid foundations for regionaleconomic integration, which begins in key sectors and eventually extends outwards to theinstitutional level. For this reason, the electricity and transport industries must be considered aseconomic priorities (Vinokurov, 2008).

Increasing the volume of freight transit using EurAsEC ITCs is made difficult in a number of ways.However, the issues are different for each mode of transport used in transit operations.

Below we discuss the main impediments to the full-scale integration of road and rail transport in

EurAsEC member countries which are relevant to this report.These problems are either physical or non-physical, with the following identified as the mostacute:


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4

Non-physical barriers are those non-technical barriers to trade, which, to a large degree, are man-made; these are:

protracted customs procedures at border crossing points, which significantly increase waitingtimes for vehicles and rolling stock;

random inspections, often requiring sealed transit containers to be opened;

non-harmonised transit tariffs across the CIS despite the signing of international agreements,transit tariffs still vary from country to country5;

migration rules the time drivers are allowed to stay in EurAsEC differs from country to country

Physical barriers include:

obsolescence and shortages of rail cars, containers and locomotives;

non-compliance of existing infrastructure and technology with international quality standards

(route handling capacities, etc.); inadequate processing capacity at border crossing points;

poorly developed logistic and communications networks and motorway service facilities;

different rail gauges throughout the CIS, the 1,520-mm gauge is used, whereas in Europe andAsia (China, Iran, Southeast Asia, etc.) the gauge is 1,435 mm. This poses additional problemswhich compound the shortage of transshipment centres and insufficient handling capacity atborder crossing points (see Table 5);

insufficient capacity for cargo handling, consolidation and deconsolidation.

5Expertopinionsontheimportanceofthisbarrierdiffer.Forexample,theCommissiononTransportTariffsandtheTransportPolicyCounciloftheEurAsECIntegrationCommitteedidnotincludethetariffproblemintheListofNon-PhysicalBarriersinEurAsEC.

Shippingpoint

RouteDistance,

km

Numberof bordercrossing

points

Numberof bogiechange

pointsLianyungang(China)

Via Kazakhstan and Russia 9200 4 2

Shenzhen(China)

Via Mongolia and Russia 11040 4 2

Via Kazakhstan and Russia 10300 4 2

TheTumannayariver

Via China, Mongolia andRussia

8900 4 2

Via China, Kazakhstanand Russia

9900 4 2

Via China (Manchuria)and Russia

9000 3 2

Via Russia 10300 2 1

Nakhodka(Russia)


Rajin(NorthKorea)

Via China (Manchuria)and Russia

8900 4 2


Pusan(SouthKorea)

Via North Koreaand Russia

11600 4 2

Via North Korea, China,Mongolia and Russia

10780 6 2

Table 5.Physical and non-physicalbarriers to trade

Source: Trans-Asian RailwayRoute Requirements:Feasibility Study onConnecting the Rail Networksof China, Kazakhstan,Mongolia, the RussianFederation and the KoreanPeninsula. UN ESCAP 1996.


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In our discussion of the most significant physical and non-physical barriers to the use of EurAsECstransit potential, we examine road and rail transport separately.

Initially, we focus on the legal and administrative problems that persist in relations betweenBelarus, Russia and Kazakhstan. The problems are even more acute for those engaged in freighttransit in other EurAsEC countries. According to an agreement between Russia and Kazakhstan onroad haulage, Chinese hauliers are practically banned from transiting cargo through Russia, andRussian trucks can travel no further than 50 km into China.

After the disintegration of the Soviet Union, all former republics inherited the same legal frameworkthat had existed in Soviet times. As national institutions developed, each country adopted lawsto protect and assist its own transport services market. There was, of course, nothing unexpectedin this process. However, certain national laws started to conflict with similar laws in other CIScountries. For example, after independence, freight carriers in Russia and Belarus had no legalproblems working together, but by 2000 these two countries (which had been the first to declarethe creation of a Unified Transport System) had adopted 28 incompatible laws pertaining tointernational road transport shipments alone, and in just three years there were 31 such laws.

It is also important to highlight developments that have had a positive impact in creating a unifiedtransport system and encouraging transit:

the full-scale commercialisation of the road transport sector, which is now dominated by privateowners;

equal access to domestic freight services markets for private and public carriers;

unrestricted (or almost unrestricted) access to foreign cargo facilities (notably, however, eachmember country bans foreign operators from engaging in coastal freight transport );

the freedom to select a carrier for the purposes of export and import contracts;

the absence of legal restrictions on foreign ownership of road transport companies; and

the abolition of permits for return journeys between certain member countries.

The most significant differences in the development of national road transport sectors are:

the varying potential of each countrys road transport sectors: for example, Belarus is a netexporter of road transport services, and Russia is a net importer. The road transport capacitiesof other EurAsEC countries (Kazakhstan, Kyrgyzstan and Tajikistan) prevents them from fullysatisfying demand for external transport services;

the unequal pace of modernisation of the vehicle fleet to current European standards;

variation between countries in the legislation governing the road transport sector6;

differing tax regimes and currency regulation for carriers and forwarding agents;

unresolved incompatibility in customs procedures for cargo transported by road, especially inthe time taken to clear customs and undergo transit cargo inspection;

differences in the regulations governing transit in different countries (including those whichhave signed up to bilateral agreements on international road traffic); and

incompatible road tax and road pricing systems7; differing regulations governing access to theroad transport market and shipping services (including licensing, professional permit systemsand other methods of state regulation).

6ThemostcomprehensivelegalframeworkcoveringrelationsbetweenroadtransportoperatorsisinBelarus.Bycontrast,therearestillno-tableomissionsinRussiantransportlaw.LegislationthathadexistedundertheSovietUnion(charters,regulationsandrules)wereretained

practicallyintactasthebasisforgoverningroadtransportoperationsuntilthesummerof2008,despitealldocumentsbeingnolongerinforce.Progressindevelopinganewlegalframeworkisslow.

7Atpresent,thereisnoconsensusonchargesfortheuseofinfrastructure.MostpartiestotheAgreementhavenolawsontollroads.Belarusistheonlycountrywhichhaslawsgoverningtheoperationoftollroadsandaroad-pricingmechanism.


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6

In order to improve the physical functioning of the transport system, a number of issues must beaddressed:

a joint agreement on multi-modal shipments should be drafted to improve the co-ordination ofriver, road and railway carriers, reduce waiting time and increase the utilisation of vehicles byintroducing modern technology to organise and service cargo flows;

transport logistics must be improved, information on the location and status of cargoes beingtransported via different ITC sections must be made transparent, and an up-to-date network oflogistics centres must be built;

a GLONASS-based cargo-monitoring system must be introduced;

a unified, automated system must be created to regulate transportation and transit processesin the different ITC sections in EurAsEC. This should be integrated into nation- and industry-wideautomated transport regulation systems;

a uniform, inter-governmental electronic document management system must be introducedas part of the international standards system. Electronic documentation must be grantedappropriate legal status;

a universal glossary and package of supporting documents must be introduced;

information on and commercial security of carriers operating on ITCs must be enhanced; and

fuel compatible with Euro 3 and Euro 4 emissions standards must be made available in Russia,Kazakhstan and Belarus, along with the building of necessary infrastructure; in addition,countries must introduce a fuel quality control system and impose stricter penalties for sellinglow-quality fuel. Vehicle weight is also an important issue in international transport law.

The above list includes realistic measures that EurAsEC countries could take to encourage transit

by road along its ITCs. However, as discussed earlier, these countries account for only a very smallpart of transit shipments. Many of the problems listed are critical and must be eliminated in thoseITC that provide access the western parts of EurAsEC countries.

We discuss below the problems that are preventing the development of rail transport along ITCs.

Firstly, there have been positive achievements: EurAsEC member countries benefit from anextensive railway infrastructure; regular traffic is properly administered; modern IT systems arebeing employed to a satisfactory level; freight technology is continually improving; and the railwaysare achieving significant time gains.

On the other hand, according to analysts, container traffic in

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